Store Brand Superhero
Kroger might be working through some overall operating challenges, but the retailer still stands head and shoulders above competitors when it comes to own-brand strategy and execution.
Fiscal 2009 was no picnic for the Kroger Co. The largest traditional grocery retailer in the United States faced what Chairman and CEO David Dillon referred to more than once as a "difficult operating environment," fraught with challenges ranging from deflation to frugal shoppers.
Even though Kroger reported that sales (measured in tonnage) rose during the last two quarters (its fiscal 2009 ended Jan. 30, 2010), profits were down, largely because of lower retail prices. But not all was gloom and doom.
In a March 9 investor conference call, Dillon noted that identical supermarket sales increased 1.2 percent during the fourth quarter (without fuel) and 2.1 percent for the year.
"We continue to widen the gap between Kroger's identical sales growth trends and those of most of our competitors," he said. "We believe this has extremely positive implications for our associates, customers and shareholders, both now and as we grow our business."
Dillon also pointed out the "significant strides" the Cincinnati-based retailer made in fiscal 2009, including a rise in the number of loyal households, continued growth in tonnage and market share gains.
During the same conference call, Rodney McMullen, Kroger's president and chief operating officer, noted that Kroger saw no decline in the popularity of its corporate brands, a reality he called "another indicator of the health of our business." In fact, store brands represented approximately 27 percent of Kroger's grocery department sales dollars, he said, and about 35 percent of grocery sales units.
Comprehensive program
Kroger's enviable store brand numbers should come as no surprise to anyone who has ever set foot in one of the retailer's nearly 2,500 grocery stores (operating under the Kroger, Ralphs, Dillons, Smith's, King Soopers and numerous other banners). Corporate brands not only are plentiful (14,000-plus SKUs), but also get the star treatment in terms of display and promotional activity.
Kroger notes on its website that own-brand products "play a central role" in the company's merchandising strategy. Each store brand is part of a three-tier corporate brand strategy that aims to fill the needs of all customers within a wide range of markets. Representing the economy tier, the Value brand delivers "good quality at a very affordable price." On the opposite end of the spectrum, the Private Selection brand (introduced in 2000) strives to meet or beat gourmet/upscale national or regional brands. Banner brands such as Kroger, Ralphs and King Soopers, meanwhile, account for Kroger's mid-tier offerings, designed to match or exceed the quality of the national brand.
Other more niche store brands also are plentiful. For example, the Active Lifestyle brand represents a range of nutritionally enhanced foods and beverages, while the Naturally Preferred brand covers a range of natural items with "only the finest ingredients, straight from the source and free from artificial preservatives and flavorings." New Fresh Selections by Kroger salads, meanwhile, not only are prewashed, but also are supported by a customer-friendly online food safety-related traceability program. And Kroger's new mirra hair care and beauty product line is designed for "family-focused women seeking effortless beauty."
Brian Kilcourse, managing partner for Miami-based Retail Systems Research (RSR Research), notes that Kroger has shown "some pretty good smarts" when it comes to launching brands.
"They share some of the understanding of how to launch a brand that is typically seen in CPG companies," he says. "They understand that you have to create the brand caché with advertising. They understand that you have to create the customer base, and you have to create the ability for the people who are curious to give it a shot."
That goes well beyond just placing a product on the shelf and hoping for the best, Kilcourse says, or simply situating a product next to a national brand — at a lower price point — and expecting people to buy it and like it.
"They actually have an honest-to-goodness marketing program built around these brands," he adds. "They're actually promoting the brand as something that has quality in and of itself, and you just happen to have to come to Kroger to enjoy it."
Neil Stern, senior partner for McMillanDoolittle LLP, Chicago, also has high praise for Kroger's store brand efforts. He says the retailer not only begins with a very comprehensive strategy — matching national brands and offering a solid everyday discount — but then supplements this strategy with a multi-tier program that also includes niche natural and organic brands.
"The comprehensiveness of the program, combined with solid execution, makes them a market leader," he says.
To help ensure new store brand foods and beverage products will win over shoppers' taste buds, the company puts them through taste testing in the laboratory and test center tucked into its Cincinnati headquarters. Consumer testers rank the products in key areas such as overall liking, flavor, appearance and texture, reports a May 15, 2009, Cincinnati.com article.
Jim Hertel, managing partner for Barrington, Ill.-based Willard Bishop, agrees that Kroger deserves kudos for its level of commitment to store brands and its comprehensive and sophisticated approach to building out the corporate brands program. He also gives the retailer credit for smart pricing, saying it uses private label as part of a strategy to compete effectively against Walmart.
"Their commitment is shown by their vertical integration — their own manufacturing plants — as well as the staff they've invested in, now led by Linda Severin (vice president, corporate brands), and their continuous emphasis on quality," he says. "They have a sophisticated approach to segmenting the market for private label: a value tier to enhance price image, a national-brand-equivalent tier to build margin, and a premium offering that can create loyalty."
Martin Meloche, Ph.D., associate professor in Saint Joseph's University's Department of Food Marketing (in Philadelphia), notes that the retailer clearly defines its three store brand tier levels, helping to eliminate customer confusion. He calls Kroger's devotion to "quality in the brand" a major strength.
Stocking the shelves
Speaking of quality, Kroger is able to keep closer-than-usual tabs on a good many of its products because it operates dozens of its own food processing facilities. Situated in locations across the country, these dairies, bakeries/delis, meat plants and grocery manufacturing plants produce roughly 40 percent of the retailer's corporate brand units.
"Kroger treats its own manufacturers much as they do outside suppliers," Meloche notes. "The fact that their manufacturing operations have to compete for the business allows them to maintain a balance."
Kroger also gains clear cost advantages through operation of its own plants, Hertel adds, as long as it makes full use of the capacity.
"The disadvantages emerge if the capacity is underutilized, and overhead costs creep up as a percent of sales," he says. "Given that the current economic winds are at private label's back, there are less of the negatives emerging these days."
Stern agrees, calling owned manufacturing a "double-edged sword." Although it does provide real leverage in scale, particularly when it comes to commodity products, owned manufacturing can reduce flexibility and limit the ability to select the "best" vendor within each category.
As for the remainder of its store brands, Kroger relies on manufacturing partners to supply items for its stores. One private label supplier, speaking on the condition of anonymity, says Kroger excels in building strong vendor merchandising partnerships that help grow store brand market share. He also notes that the retailer shows loyalty toward vendors that perform well in quality, service and innovation.
Still, that same supplier contends Kroger has room for improvement — most notably, in speed to market and in collaboration and alignment of its operating divisions.
Yet another private label supplier, also asking for anonymity, says his company has gone out of its way to supply Kroger with requested samples of "emerging-trend" types of products. But after shipping the samples to Kroger — and following up with phone calls and emails to request an appointment — the company invariably learns that the retailer's plans have changed.
"What honestly happens is they take the SKU recommendation and methodology from our presentations and ask the current vendor to produce the SKU for them," he says. "Why? Because that vendor has a volume contract with Kroger, and every dollar helps Kroger reach to that level. I say just be honest and upfront so we both don't just waste our time."
Shopper focus
Although Kroger might not be the ideal partner in every private label supplier's eye, it is at least attempting to be the ideal retailer in (almost) every shopper's eye. Through its joint venture with London-based dunnhumby (dunnhumbyUSA) — which specializes in data management, customer analysis and insight-led planning — Kroger crunches customer loyalty card data to better understand its customers and identify opportunities to enhance their shopping experience in its stores. The retailer is able to target promotions based on individual shopper preferences — to a level that's far above what most other retailers are able to do today. (Kroger also sells its shopper data, sans personal info, to a number of major CPG companies to assist them on the consumer insights side.)
Hertel says the joint venture has facilitated a great deal of shopper insights development, at both a key category level and a total store level.
It also can be of tremendous help on the product development and assortment sides of the equation.
"The era of product customization has come to the grocery industry," Meloche adds. "This relationship will allow Kroger to keep its finger on the consumer's pulse and adapt their product offerings for various locales as needed. This can really only be done with private label."
Kilcourse calls the Kroger-dunnhumby joint venture "really exciting" because it marries internal insights to external insights. Unlike the processes most retailers still rely on to plan their assortments, which are based on past sales and exhibit "a great deal of inexactitude," the dunnhumby model allows Kroger to determine what its assortment should be on a fairly local level.
"At that's exciting for a bunch of reasons," Kilcourse says. "First of all, consumers are demanding it. And second, it helps them to make more efficient use of their inventory choices. And after all is said and done, inventory is cash."
But most important of all, Kilcourse says, is the ability Kroger now has to understand affinities between purchases based on a fairly complex set of customer attributes, or psychographic data.
"It's marrying a richly attributed set of consumer data with your internal data so that you can tell not only what you've been selling all along, but also what you could be selling," he says. "And also what ought to go together — the affinities you might not be seeing. And it does it at a fairly granular level. You can use that to change the way you do just about everything."
Eye on the competition
The joint focus on customer insights and corporate brands also represents a critical defense mechanism, as Kroger looks to keep other retailers from cutting into its loyal shopping base. Walmart, in particular, remains a threat.
"To date, we hear that [Walmart's] Great Value relaunch has produced positive, but not spectacular results," Hertel says. "I think a bigger challenge for Kroger will be if Walmart gets more aggressive on national brand prices as has been rumored. National brands are 'common currency' which facilitate shoppers' price comparisons."
Walmart really has not been aggressive in marketing its Great Value relaunch, Stern adds.
"Walmart's penetration is still below even conventional supermarkets," he says, "and they still talk to being a 'house of brands' without favoring their own brands. SKU rationalization might help private label, but the evidence to date suggests that they are treating all brands more or less the same."
Although Meloche expects Walmart to continue to adversely impact other retailers within the grocery industry as it expands, he does not believe the Bentonville, Ark.-based giant will have an effect on Kroger's store brand program.
"As long as Kroger continues to take a position in private label and focuses its efforts on developing the brand and the products within it, they will continue to flourish," he maintains.
Kilcourse, a huge fan of Kroger, believes the retailer's management team is doing a fantastic job in fending off the competition. In fact, Kroger itself actually could become a threat to the regional players living between the price-minded zone owned by Walmart and the like, he says, and the higher zone owned by Wegmans, Whole Foods and others, which boasts fiercely loyal customers willing to pay more for what they perceive to be an extraordinarily high-quality solution.
"I think what they need to do is stay focused," he says. "Right now, if I were in Kroger's shoes, I would probably put even more weight on private label."
Kroger's sheer size and diversity of operations present their own challenges, of course.
"Kroger has many different banners," Meloche says, "and integrating all of these cultures is problematic."
Kroger's greatest challenge in managing all those banners "across a number of different geographies" always has been consistency, Stern maintains.
"Private label remains a huge strength and somewhat of a constant," he says, "but the company is always challenged to get all of their markets firing on the same cylinders at the same time."
Herb Sorensen, Ph.D., global scientific director, consumer and shopper insights for New York-based TNS North America, also suggests that Kroger might not be immune to the challenges faced by the oodles of other retailers keen on acquiring senior brand talent from CPG manufacturers. (Kroger hired Severin fresh from ConAgra Foods, where she had served as director of marketing.)
"Interestingly, many of these efforts involve revolving doors, with frustration on both sides," he says, not referring specifically to Kroger or any other retailer. "The reason is simply the difference in culture between the retailer's merchant mindset and the aspirational marketing that is the heart of what 'brand' is all about."
Most retailers are firmly committed to price as the dominant sales tool, Sorensen explains, expecting the money required to reduce prices to come from the national brands. But in reality, price can tell shoppers two things: what the item will cost them to buy, and more important, what the item actually is worth.
"The reality is that raising the price, in a strong brand context, can actually result in increased sales," he adds. "As Kroger and other retailers vigorously pursue their 'co-opetition,' we will know retailer private branding is really in the game when we see retail brands with premium pricing — whether at Kroger or elsewhere."
Kroger, at a glance
Headquarters: Cincinnati
Top Executives: David Dillon, chairman and CEO; Rodney McMullen, president and chief operating officer.
Grocery retail banners: Kroger/Kroger Marketplace, Ralphs, Dillons, Smith's/Smith's Marketplace, King Soopers, Fry's/Fry's Marketplace, QFC, City Market, Hilander, Owen's, Jay C, Pay Less, Baker's, Gerbes, Scott's Food & Pharmacy, Fred Meyer, Food 4 Less, Foods Co (2,468 total grocery retail stores; 893 supermarket fuel centers and 1,967 pharmacies included in stores within this segment).
Other retail operations: 777 convenience stores and 374 fine jewelry stores operating under various banners; 893 supermarket fuel centers.
Source: The Kroger Co., based on fiscal 2009 fourth-quarter data.
Need for Speed
In April, Kroger endorsed the Rapid Recall Exchange, an online service that standardizes and accelerates food and product recalls and withdrawals. The retailer said it will be the first national retail chain to encourage its suppliers to subscribe to the program, which was developed by GS1 US in collaboration with the Food Marketing Institute and the Grocery Manufacturers Association.
"Using Rapid Recall Exchange provides Kroger with timely and accurate recall data," said Dr. Payton Pruett, Kroger's vice president of corporate food safety. "The need for speed is crucial in recall situations, and this will help us be more efficient in removing recalled product from our shelves and communicating with our customers about recalls."
'Right now, if I were in Kroger's shoes, I would probably put even more weight on private label.'